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VOLUME 13 | ISSUE 3 |JULY 2021
INVESTMENT
LETTER FROM THE
CHIEF INVESTMENT OFFICER
page 2
STRATEGY HY THE RECENT G7 MEETING
W
WAS JUST A START
page 10
OUARTERLY ECOND HALF 2021 EUROPEAN
S
EQUITY OUTLOOK:
page 12
Investing Is Not a Trivial Pursuit ®
THE EVOLUTION BIDEN’S INFLATION Q&A - THE
OF MONEY INFRASTRUCTURE YEAR OF DISBELIEF
page 4 AGENDA page 14
page 7
INVESTMENT STRATEGY QUARTERLY
Letter from the Chief Investment Officer
Investing Is Not a Trivial Pursuit®
Americans, bored in their COVID-induced ‘bubbles,’ turned to board games for fun last year, boosting
sales 300%. They rolled the dice, drew the cards, and buffed the skills of cooperation, problem solving,
emotional intelligence, and reflective logic — the same competencies critical to successful invest-
ment strategies. So, we couldn’t help looking back nostalgically to our favourite games — and probably
yours — as we look forward to crafting a sustainable investment game plan.
Like players in Cluedo®, ‘The Classic Mystery Game,’ we have to be In the 1960s, Milton Bradley introduced battery-powered Opera-
good detectives, hunting for clues to either affirm or alter our tion®, which tested kids’ ability to remove ‘butterflies in the
views. These unprecedented times are a whole new game, often stomach’ and other ailments without setting off a buzzer. As the
demanding a fresh financial toolkit to solve the mysteries of the economy heals, the ‘money doctors’ at the Federal Reserve (Fed)
market. In other words, it’s no Trivial Pursuit®. will be delicately removing some of the ultra-accommodative
monetary policy that nursed the economy back to full speed. The
Remember how good you felt, passing ‘Go’ in Monopoly® and col-
trick: remove pieces from the accommodative policy without
lecting $200? Now imagine the U.S. economy as consumers pass
being zapped by surging inflation or short-circuiting the economy.
‘Go’ with a collective $2 trillion in excess spending capacity as a
The Fed will need to keep a steady hand and be patient. If inflation
result of Congress’ generous, stimulus-driven ‘Community Chest.’
proves transitory and peaks during the third quarter as we expect,
That chest continues to grow with the Child Tax Credit beginning
the Fed will be able to taper its bond purchases by late this year/
in July and prospects for additional government infrastructure
early next year and not raise rates until 2023.
packages. While taxes are likely to move higher for corporations
and the wealthy, the ‘Income Tax’ card will be less onerous than Fixed income investors will need to remain flexible — like the
originally outlined. With the U.S. debt ceiling likely raised by the players in the famous party game Twister®. Global investors will be
end of July or soon thereafter, there is little ‘Chance’ of govern- stretching for yields in an environment of near record-low (if not
ment default or bankruptcy. negative) yields. Positive yields in the U.S. seem like a winner, con-
tinuing to attract foreign investors and keeping yields lower than
Of course, the real game-changer for the economy wasn’t the ‘Get
valuations may suggest. However, the healthy U.S. economic envi-
Out of Jail Free’ card; it was the ‘Get Out of the House for Free’
ronment and the uptick in inflation should push yields higher.
vaccine process that has inoculated more than 60% (and growing)
These entangling forces are keeping yields knotted in a tight range,
of U.S. adults. Now that consumers can join friends for dinner, go
but we ultimately expect the 10-year Treasury to move modestly
to sporting events and concerts, and travel on planes, the U.S. has
higher and finish the year at about 2.0%. If yields move decisively
regained all of its economic activity lost during the recession. The
above 2%, don’t be surprised if the Fed adds its own ‘Twist’— pur-
hot real estate market proves that people are ‘buying properties’
chasing bonds on the long end of the curve to keep interest rates
in classic Monopoly® fashion and higher home prices are a key
lower. While the strength and breadth of the economy remain
driver of the positive wealth effect for consumers. Once more, eco-
solid, valuations continue to favour the highest quality bonds from
nomic growth should go racing around the board on the back of
a risk/return perspective.
robust consumer spending, rebuilding inventory levels, recovering
foreign economies, and rising U.S. employment (expect an average In equities, it’s easy to Connect Four® reasons why this young bull
of 500,000 new jobs a month over the next six months). As a result, market will continue for the foreseeable future: 1) a still-improving
2021 GDP growth will likely meet, if not exceed, our expectation of macroeconomic backdrop; 2) attractive valuations, especially
6.2% and remain strong into 2022. versus bonds; 3) increased shareholder activities in the form of
growing dividends and buybacks; and 4) strong earnings growth
Investment Strategy Quarterly is intended to communicate current economic and capital market information along with the informed perspectives of our investment professionals.
You may contact your wealth manager to discuss the content of this publication in the context of your own unique circumstances. Published 06/07/2021. Material prepared by
Raymond James as a resource for its wealth managers.
2
JULY 2021
expectations. With earnings growth expected to surge more than mid-2022. Demand from South Asia is critical to reaching the
60% during the second quarter and maintain a vigorous trend into pre-pandemic peak of 100 million barrels per day. OPEC+ (includes
2022, equities should grind higher, albeit at a slower pace than Russia) continues to exercise discipline in adjusting supply levels,
over the last year. We revised our 2021 year-end target for the S&P but investors should consider the potential for U.S. sanctions to be
500 to 4,400 and expect it to rise to 4,600 by year-end 2022. lifted on Iranian oil. Therefore, we are only slightly raising our
A modest corporate tax increase to 25% (from the current 21%) year-end target for West Texas Intermediate to $75 from $70 per
shouldn’t deter a string of positive quarterly earnings. While our barrel. Further supporting commodities is our expectation that the
bias remains more US-centric with a focus on U.S. large-cap and U.S. dollar will weaken slightly by year end versus major currencies
small-cap stocks, it’s possible an acceleration in reopenings in like the euro (year-end target: 1.25 EURO/$).
other parts of the world (like Europe) could lead to potential short-
Despite our optimistic message, there is no lack of potential Risk®:
term trading opportunities. Our growth versus value positioning is
COVID variants, geopolitical tensions, and politics. However,
more of a ‘draw’ as our preference for big-cap Technology and
taking on undue risk to your portfolio is Taboo®. Just like these
Consumer Discretionary is offset by our preference for Financials,
classic games, the rules for investing remain timeless — adhere to
Energy and Industrials.
your asset allocation strategy, periodically review your goals and
So far this year it’s been Candy Land® for commodity investors, with objectives, don’t let emotion dictate your investment decisions,
gradual, sustainable reopenings across the globe leaving sellers and, of course, work with your advisor. A successful investing team
vying for key inputs to satisfy pent-up demand. Investors found can make the real Game of Life ® even more enjoyable! Best wishes
‘King Kandy’ as lumber and industrial metals raced to or near for a wonderful summer!
record highs due to bottlenecks. These price increases should sub-
side as supply constraints dissipate. In terms of global oil demand,
the recovery in North America, China, and Europe has been sub-
stantially realised, but still-intact COVID restrictions leave much of
South Asia, with its 1.4 billion people, on the dreaded ‘licorice
space’ – the sticky spot that slows down the game. We anticipate it Lawrence V. Adam, III, CFA, CIMA®, CFP®
won’t be all ‘lollipops and rainbows’ for global oil demand until Chief Investment Officer, Raymond James
Investment Strategy Committee Members
Lawrence V. Adam, III, CFA, CIMA®, CFP® – Committee President, Joey Madere, CFA Senior Portfolio Analyst, Equity Portfolio & Technical Strategy
Chief Investment Officer, Raymond James
Ed Mills Managing Director, Washington Policy Analyst, Equity Research
Chris Bailey European Strategist, Investment Services Ltd.*
Pavel Molchanov Director, Energy Analyst, Equity Research
Scott J. Brown, PhD Chief Economist, Raymond James
James C. Camp, CFA Managing Director, Strategic Income, Tracey Manzi, CFA Senior Investment Strategist, Investment Strategy
Eagle Asset Management*
Doug Drabik Managing Director, Fixed Income Research Chief Investment Office
J. Michael Gibbs Managing Director, Equity Portfolio & Technical Strategy Anne B. Platt, AWMA®, AIF®, RICP® – Committee Chair, Vice President,
Investment Strategy
Nick Goetze Managing Director, Fixed Income Solutions
Giampiero Fuentes Investment Strategy Manager, Investment Strategy
Nicholas Lacy, CFA Chief Portfolio Strategist, Asset Management Services
Kailey Bodine Investment Strategy Analyst, Investment Strategy
*An affiliate of Raymond James & Associates, Inc., and Raymond James Financial Services, Inc.
3
INVESTMENT STRATEGY QUARTERLY
The Evolution of Money
Scott J. Brown, PhD, Chief Economist, Raymond James
Money is the lifeblood of the economy, a key factor in the These early forms suffered from a lack of central control or
historical development of society. Try to imagine life enforcement.
without it. However, money has changed a lot over time As civilisation developed, metals such as bronze, copper, or tin,
and technology will continue to drive further changes, would be exchanged, with the idea that they had an end use (they
could be made into cooking utensils or weapons, for example).
offering benefits as well as potential risks.
Authorities began to issue coins, and the value would be based on
the metal used. This helped to improve commerce, but the value
Economists note three functions of money: it is a medium
depended on the scarcity of the type of metal used. Gold and silver
of exchange, a store of value, and a unit of account. Money coins became more common.
is liquid so it can easily be used to purchase goods and
When Marco Polo returned from the East, he reported that the
services. Inflation reduces its purchasing power over
Chinese were using paper money. At the time, this sounded like a
time, but otherwise, money can be saved and spent later. crazy idea, but eventually it caught on. Initially, the paper money
Money serves as a yardstick to measure accounts, costs, was backed by a physical commodity such as gold or silver, the
and prices. value of which changes depending on supply and demand. When
gold and silver began arriving from the New World, inflation in
Europe increased.
A BRIEF HISTORY
Prior to the development of money, people had to barter, The U.S. and other countries left the gold standard (the backing of
exchanging one type of good for another. An easier way was paper money by a reserve of gold) in 1973, and we now have what’s
needed to keep track of who owed what to whom and so systems called ‘fiat money.’ That is, there is no inherent value in the dollar;
of ledgers were developed. In some places these IOUs were in its worth is determined by a shared concept of what it can buy. The
tokens, such as shells, beads, or whale teeth, which could be dollar is ‘legal tender,’ meaning that courts of law recognise it as a
exchanged, serving as an early type of money (as well as credit). satisfactory payment of monetary debt.
4
JULY 2021
100 The Rise and Fall of the Dollar
Purchasing Power of the U.S. Dollar (1913 – 2021)
Federal Wall Street crash
Reserve (Black Thursday)
80 is created
Bretton Woods
agreement
COVID-19
Purchasing Power ($)
pandemic
60
Oil Lehman
crisis Brothers
40 collapse
Second
oil crisis
Dotcom
bubble Trump
20 tax cuts
0
1913 1925 1937 1949 1961 1973 1985 1997 2009 2021
Source: FactSet U.S. Recession Periods
FRACTIONAL BANKING AND THE CREATION OF MONEY The relationships between the monetary aggregates (M1, M2, etc.)
These days, the concept of money includes much more than hard and growth and inflation broke down by the early 1990s. The Fed
currency. In fact, paper currency and coins account for a tiny still keeps track of the money supply measures, but doesn’t place
fraction of transactions. much weight on them in setting monetary policy.
There are a number of money supply measures, each reflecting
STORE OF VALUE AND INFLATION
degrees of liquidity. The monetary base includes currency in
The Fed has two legislated goals (the dual mandate), price stability
circulation and reserves of banks and other depository institutions
and maximum sustainable employment. Most other central banks
held at the Federal Reserve. M1 includes currency held by the
have just one focus, price stability. The Fed interprets price stability
public and checking accounts. M2 equals M1 plus savings deposits,
as 2% inflation in the Personal Consumption Expenditures (PCE)
small-denomination time deposits (less than $100,000), and retail
Price Deflator.
money market fund shares.
In the past, the dual mandate was seen as one primary goal in
The Federal Reserve (Fed) creates money through open market
practice. That is, if the Fed worked to keep inflation low and steady,
operations, buying Treasury securities from commercial banks
the job market would be stronger on average. If the Fed let inflation
using money it creates out of thin air. The Fed receives the
get out of hand, it would have to raise interest rates more to get
securities from the commercial bank and issues them bank
inflation back down, weakening the economy and boosting
reserves. These reserves are then multiplied through the fractional
unemployment; thus, the Fed would act pre-emptively to head off
reserve banking system*.
inflation.
Banks are required to hold a certain percentage of deposits in
The Fed’s thinking has evolved over time, and after a lengthy
reserve. The rest can be lent out, adding to the money supply. By
review, it announced a formal change in its monetary policy
making loans (in excess of required reserves), the money supply is
framework in August 2020. The Fed now has an average inflation
expanded. The Federal Open Market Committee, which includes
targeting system. The long-term inflation goal remains at 2%, but
the members of the Fed’s Board of Governors and five of the twelve
following a period of inflation below 2%, the Fed will pursue a
Fed district banks, raises or lowers short-term interest rates to
period of inflation above 2%.
adjust bank reserves.
*Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal.
5
INVESTMENT STRATEGY QUARTERLY
The Fed also made its employment goal broader and more Some cryptocurrencies, called ‘stablecoins,’ are tied to a hard
inclusive. It will look at a wide range of labour market indicators in currency (such as the dollar). Stablecoins improve payment
setting monetary policy. During its review, the Fed discovered that efficiency, speed up settlement flows, and reduce user costs, but
low unemployment is especially beneficial to lower-income they don’t offer the same protections as conventional payment
communities. systems, like your bank account.
The new policy framework is now being tested at a time of great The Fed has been studying the risks and benefits of CBDCs for several
uncertainty. Inflation is higher on a year-over-year basis, but that years now and will issue a discussion paper summarising its findings
partly reflects a rebound from the low inflation of a year ago (these this summer. Fed chair Powell indicated that “Our forthcoming paper
are called ‘base effects’). Production bottlenecks and materials on the evolution of digital payments is intended — along with our
shortages occur in economic recovery, but these difficulties are other work as a supervisor, regulator, and payment system operator
resolved over time. Pressures are more intense than usual now — to advance the objective of ensuring that the payments system
because this is a very rapid recovery. and the economy work for all Americans.”
Inflation expectations are a key driver of actual inflation. If workers
IN CONCLUSION
anticipate higher inflation, they are more likely to ask for wage
increases and businesses are more likely to raise prices. Inflation Cryptocurrencies are not going away anytime soon, but they won’t
expectations have moved higher in the last few months, but have replace the dollar. Large fluctuations in value and high transaction
begun to moderate. The key is whether higher inflation expectations fees make them inappropriate for use in regular commerce.
are sustained – and we won’t know for sure until after the fact. CBDCs, tied to conventional securities like the dollar, are coming,
which will have many of the attractive features of these new types
While Fed officials believe that inflation pressures will prove to be of money, but will also provide better security and steadier value.
transitory, they are confident that they have the tools to bring
inflation down if we get a sustained increase in the underlying Electronic payments have been with us for a long time. In its early
inflation trend. days, the Federal Reserve ensured bank transfers made by
telegraph. Credit cards have advanced significantly and we can
now transfer funds using our mobile phones. In that sense, the
CRYPTOCURRENCIES AND DIGITAL CURRENCIES
future is already here.
Cryptocurrencies, such as Bitcoin, Ethereum, and Dogecoin, are
digital assets, using distributed ledger technologies, such as
blockchain, to secure transaction records and verify transfers.
They are an elegant solution to no particular problem with KEY TAKEAWAYS:
conventional money. • These days, the concept of money includes much more
than hard currency. In fact, paper currency and coins
The use of cryptocurrencies as a medium of exchange is limited.
account for a tiny fraction of transactions.
They can be used to buy a small number of goods and services and
transaction fees tend to be high. They may store value, but as • The Fed now has an average inflation targeting system.
we’ve seen, that value can change dramatically from day to day. To The long-term inflation goal remains at 2%, but
date, cryptocurrencies have not served as a convenient way to following a period of inflation below 2%, the Fed will
make payments. pursue a period of inflation above 2%.
Critics have likened cryptocurrencies to a pyramid scheme and • While Federal Reserve officials believe that inflation
point to a number of negatives. They are used widely in money pressures will prove to be transitory, they are confident
laundering, the illegal drug trade, and other criminal activities (but that they have the tools to bring inflation down if we
then again, so is paper currency). A lot of energy is used in mining get a sustained increase in the underlying inflation
new cryptocurrency, adding to concerns about climate change. trend.
• Cryptocurrencies are not going away anytime soon,
Digital currencies, including cryptocurrencies, are money in
but they won’t replace the dollar.
electronic form. Central Bank Digital Currencies (CBDC) are (or will
be) issued by a central bank. China has a digital Renminbi, but
most other central banks are still studying CBDCs. As part of the
money supply, CBDCs will still be a fiat currency, but will offer
security in transactions and transfers.
6
JULY 2021
The Road Ahead for Biden’s Infrastructure Agenda:
Impact on Spending, Deficits, and Taxes
Ed Mills, Managing Director, Washington Policy Analyst, Equity Research
After more than a year of pandemic-related market
uncertainty, attention is turning to the recovery stage of While negotiations are highly in flux and divergent
U.S. policymaking and the more than $4 trillion in outcomes cannot be fully ruled out, current indications are
infrastructure and social program spending outlined by that an infrastructure package in the $2 trillion to $3 trillion
range, with about $1 trillion in deficit spending, is likely by
the Biden administration earlier this year. While the end of this year or early next year.
negotiations are highly in flux and divergent outcomes
cannot be fully ruled out, current indications are that an
The question remains, where do we go from here? The path
infrastructure package in the $2 trillion to $3 trillion range,
forward will be guided by political decisions, particularly on the
with about $1 trillion in deficit spending, is likely by the size of the package (large, single bill, or separate attempts) and
end of this year or early next year. whether it advances with bipartisan support or by a Democratic-
only reconciliation push requiring only a simple majority in the
Broadly, we expect a final package to cover three main pillars:
Senate. These factors will influence the final provisions of the
traditional infrastructure (such as roads, bridges, and highways);
infrastructure package, and should be monitored as legislation is
investment in U.S. domestic manufacturing through clean energy
crafted into the fall.
and next-generation technology supply chains; and investment
into social infrastructure via an extension of the recently-enacted
WHAT’S PROPOSED VS. WHAT’S POSSIBLE
Child Tax Credit expansion and increased funding for education.
Along these lines, we expect Congress to take select portions of From a high level perspective, Biden’s American Jobs Plan (AJP)
the American Jobs Plan (AJP) and American Families Plan (AFP) proposes around $2.3 trillion over ten years, with the core of the
and pair them with associated tax adjustments to raise revenue, package targeting traditional transportation infrastructure and
tilted more toward corporate tax changes. domestic manufacturing capability. The plan also envisions around
7INVESTMENT STRATEGY QUARTERLY
Estimated Spending on the Proposed American Jobs Plan
Infrastructure at Home Transportation Businesses Caretaking
$726 billion $621 billion $580 billion $400 billion
Affordable and Education Electric vehicles Rail Manufacturing and Care for elderly and
sustainable housing $137B $174B $80B small business disabled people
$213B $300B $400B
Bridges and roads Infrastructure
Other $28B $115B resilience
$50B Research and Workforce
Water Broadband Electricity development
Transportation development
$111B $137B $100B inequities $100B
$45B $180B
Public transit Ports* $42B
$85B
Other $30B
Source: White House, Overview of “American Jobs Plan,” as proposed, March 31, 2021
*Airports, water transit, and ports
$100 billion each for water, electricity, broadband, and education with the education, childcare, and expanded leave provisions in
infrastructure. We view these provisions as the most likely to pass the AFP under reconciliation rules, as these may be viewed more as
in a final package given overall strong bipartisan support, but the policy provisions than spending/revenue. As such, we view the
scope of the funding for these priorities remains a moving target. bulk of the programs under the AFP as more politically challenging
We also see a foreign policy angle to this aspect of Biden’s to work into a final package, thus they are more likely to be
infrastructure agenda that raises the political urgency around an Democratic campaign proposals tied to the 2022 midterms.
infrastructure bill. The domestic manufacturing aspect of the
Overall, we view the two plans as a menu of policy options for
proposal is directly aimed at securing the ability for the U.S. to
lawmakers to debate and advance in a legislative package. We see
remain economically competitive with China. As such, Biden’s
the most likely final bill having a core focus on traditional
strategy can be viewed as putting the U.S. on the footing to sprint
infrastructure, tied to several AFP priorities – most likely an
ahead, rather than hold China back, through economic policy.
extension of the CTC and some new education funding. This brings
Biden’s proposal seeks significant investment (around $250 billion)
the final spending total to the $2-3 trillion range, depending on the
in domestic research and development of next-generation
final funding levels for individual provisions.
technologies. Specific sectors targeted for funding are
semiconductor manufacturing, as well as clean energy technologies
including: energy storage, carbon capture, hydrogen, advanced EXPECT PROPOSED TAX CHANGES TO BE DIALED BACK
nuclear, rare earth separation, wind, and biofuel. Expect this to be a Much attention has focused on the proposed tax changes as
significant selling point by the administration as it looks to secure revenue sources for Biden’s infrastructure priorities, which we
bipartisan support for Biden’s infrastructure agenda. broadly view as some of the most fluid aspects of ongoing
negotiations. The ultimate corporate tax rate, adjustments to
The second phase of Biden’s policy reforms - the American Families personal taxes for wealthy taxpayers, and the fate of state and local
Plan (AFP) — focuses more on social programs with around $1.8 tax (SALT) adjustments continue to be the top issues of the tax
trillion in spending and tax credits. Broadly, the plan envisions $500 debate in Washington. As we have previously highlighted, the
billion toward education and around $450 billion for childcare revenue source with the most political support in Biden’s
programs and paid leave. The plan also proposes extending the infrastructure agenda is a higher corporate tax rate, but at a lower
expanded Child Tax Credit (CTC) under the American Rescue Plan rate than the proposed 28%, likely in the 24-25% range. Moderate
through 2025, tying it to the expiration of the personal tax code Democrats are reportedly uneasy with the political consequences
provisions of the 2017 tax law. However, there are potential issues of raising the capital gains rate to the proposed ordinary income
8JULY 2021
“Winfrastructure,
e see the most likely final bill having a core focus on traditional
tied to several priorities – most likely an extension of the
Child Tax Credit and some new education funding. This brings the final
spending total to the $2 trillion to $3 trillion range, depending on the final
funding levels for individual provisions.
”
rate of 39.6% for incomes above $1 million with SALT caps in place, priorities. With Democrats seeing this as a once in a generation
raising the chances that the capital gains rate change, if included, opportunity to advance domestic investments, we are likely
also trends lower. The balance is between three items on capital heading toward a $2-3 trillion final bill with some revenue-raising
gains – the rate, step-up in basis, and implementation date. If provisions as cost offsets. The least politically-sensitive revenue
compromise is found on the rate and step-up exclusion, the measures would target increased IRS enforcement (projected to
effective date could come earlier, as currently proposed by the capture around $800 billion in missed federal revenue) and a higher
Biden administration (retroactive to its announcement in April corporate tax rate/tightened international corporate tax rules. As
2021). We expect continued emphasis on popular support for these such, while we expect a robust debate on specific policy details into
corporate and individual tax changes by the Biden administration, the fall, the politics of the infrastructure debate have likely already
but the current political dynamics highlight the difficulty of finding paved the road to be taken to a final bill later this year.
agreement among Democrats with very limited room to manoeuvre
given the slim margins in both chambers of Congress.
KEY TAKEAWAYS:
We will specifically be watching dynamics among Democratic House • An infrastructure package in the $2 trillion to $3 tril-
lawmakers as the capital gains tax would be an even bigger hit to lion range, with about $1 trillion in deficit spending, is
high-tax states with their own state-level capital gains charges, such likely by the end of this year or early next year.
as New York and California. Lawmakers from these states, especially
• The most likely provisions to pass are funding for
in swing districts, are likely to see political blowback from their
water, electricity, broadband, roads, bridges, trans-
constituents. However, many are also concerned about primary
portation, and education infrastructure given strong
challengers from the left. As such, support for a capital gains rate
bipartisan support, but the scope of the funding for
hike with some moderating adjustments to the current proposal
these priorities remains a moving target.
would likely be the preferred policy path forward for these members.
As it currently stands, Speaker Pelosi can only lose two votes to • The domestic manufacturing aspect of the proposal
advance legislation, giving these lawmakers significant leverage to is directly aimed at securing the ability for the U.S. to
influence the tax debate. remain economically competitive with China. Expect
this to be a significant selling point by the adminis-
REGARDLESS OF THE PATH FORWARD, THE OUTCOME tration as it looks to secure bipartisan support for
WILL LIKELY BE THE SAME Biden’s infrastructure agenda.
We expect volatile headlines over the course of the summer and • The second phase of the infrastructure agenda — the
into the fall on the specifics of an infrastructure deal, which could American Families Plan (AFP) — focuses more on
cause volatility in markets; however, our forest from the trees view social programs with around $1.8 trillion in spending
is that the outcome is likely to be the same no matter the process and tax credits. Broadly, the plan envisions $500 bil-
going forward. There is a growing acceptance of around $1 trillion lion toward education and around $450 billion for
in deficit spending tied to Biden’s infrastructure priorities, and the childcare programs and paid leave.
legislative tools are there for Democrats to pass either a primary bill
• While we expect a robust debate on specific policy
or a secondary bill with only Democratic support. As these pieces
details into the fall, the politics of the infrastructure
come into place, the debt limit will have to be raised later this fall,
debate have likely already paved the road to be taken
which will almost certainly have to be done via a reconciliation
to a final bill later this year.
simple majority vote that could include additional infrastructure
9INVESTMENT STRATEGY QUARTERLY
Why The Recent G7 Meeting Was Just A Start
Chris Bailey, European Strategist, Raymond James
“continuing
There must be a beginning of any great matter, but the
unto the end until it be thoroughly finished
”
yields the true glory - Francis Drake
The G7 meeting last month in Cornwall will have assisted meetings held over recent years. Given heightened focus, unsur-
the local tourist industry for the next few years, but it also prisingly, there was a commitment for climate change, a reduction
in the use of coal and a target to send at least one billion vaccines
reflected some ongoing political and practical evolutions in
to the developing countries.
an always evolving world. Whilst the COVID-19 crisis has
Collectively this appears a sign of real progress, however - as
meant that economic and societal challenges of the early
always - it is easy to talk and harder to deliver. Practical progress
2020s will take a number of years to work through, there comes first with similar conclusions by the broader G20 meetings
are many other changes occurring in the world that need and ultimately via actual legislative decisions by individual gov-
addressing. ernments, a point regularly made over recent discussions on
climate change and the setting of global minimum corporate tax
The G7 - or ‘Group of Seven’ - first met in the early 1970s at the rates. Real progress as always finishes with individual countries
time of a global oil crisis and was originally known as the ‘Group making a domestic change, which possibly may have short-
of Five’ formed by the U.S., U.K., West Germany, Japan, and er-term local cost and productivity implications. Certainly the
France. The current grouping of Canada, France, Germany, Italy, current request by many emerging market economies to be given
Japan, the U.K. and the U.S. is also joined by the president of the a longer period of time to make climate change progress than
European Council and the president of the European Commis- their developed market peers, is likely to be a discussion for many
sion. The twenty-five page communiqué last month signed by all years.
members was certainly impressive compared to some previous
10JULY 2021
G20 ATTENDEES
Argentina, Australia, Brazil, Canada, China, France, Germany, Japan, India, Indonesia, Italy,
Mexico, Russia, South Africa, Saudi Arabia, South Korea, Turkey, the United Kingdom, the United
States, and the European Union. Spain is also invited as a permanent guest.
And then there is the relationship with China. The G7 meeting taxation issues. G7 leaders may have some quite distinct written
last month contained a relatively modest mention of the cur- conclusions from their time in Cornwall but patently it is just a
rent controversies in the Far East including the debate over start and far from a conclusion. On this basis expect the meet-
human rights in the Xinjiang province in China or autonomy for ings of this group in Germany in 2022, Japan in 2023 and Italy in
Hong Kong. Whilst the current 100th anniversary of the creation 2024 to have further disclosures and influences. However
of the Chinese Communist Party, has unsurprisingly received before we even get there, do not forget that the U.K. will host
little comment from the leaders of the G7 countries, further the 26th UN Climate Change Conference in Glasgow on 31
criticisms have been more mixed outside of the U.S. Whilst October later this year. Insights from a more northern part of
American policymakers feel a particular sensitivity towards a the U.K. is set to offer even more discussion. The real key how-
country which over the next decade is likely to offer more chal- ever is still to apply some overt policy decisions. As both
lenges to their position of global economic leadership, the financial and political arenas know only too well: what ulti-
situation in some other parts of the developed world offers the mately matters is what you do.
scope to be very different. European Union leaders - for example
- have been more circumspect due to the importance of trade
relations, a point made over many quarters by corporate earn- KEY TAKEAWAYS:
ings data. • The recent G7 meeting in the U.K. saw a lengthy com-
muniqué.
Diplomacy is however at least an attempt to keep corporate
• Further discussions on climate change and corporate
trading going and to avoid a war. It was certainly striking to see
taxation.
the new U.S. president meeting his Russian counterpart for a
meeting in Switzerland, a few days after both the G7 meeting • The U.S. and Europe are developing different relation-
and the gathering of North Atlantic Treaty Organisation (NATO) ships with China.
countries. Certainly there were times a few decades ago when
• Diplomacy continues to support corporate trading
such relationships were somewhat different.
with China.
And this brings us back to the climate change and corporate
11INVESTMENT STRATEGY QUARTERLY
Second Half 2021 U.K./European Equity Outlook:
Chris Bailey, European Strategist, Raymond James
“ Bsecond
asically, the first half of life is writing the text, and the
”
half is writing the commentary on that - Richard Rohr
Equity markets in both the U.K. and Europe have not only thoughts have fully factored in next year and even fewer early
achieved notable gains during the first half of 2021, but have thought about 2023. Equity markets typically appraise pros-
also performed much more strongly than expectations. Whilst pects for the next six to eighteen months. So whilst corporate
the perceptions towards COVID-19 vaccine growth potential earnings growth hopes for the rest of 2021 are likely to continue
were already rapidly improving by the first few months of the to improve, comparisons for the average company as 2022 pro-
year, full year 2021 earnings growth expectations were antici- gresses will become more difficult. Whilst prospective equity
pated to be around thirty percent compared to last year. By the market multiple valuations are far from being historically exces-
end of June, anticipated full year earnings growth for the equity sive, prospects for next year and beyond have more questions.
markets in the U.K. and Europe was expected to rise over sixty Inevitably even for equity market investors this starts with local
percent. economic growth rates and central bank policy.
So where do we go from here? Whilst anticipated economic Equity markets do not exist in isolation, but are at the mercy of
growth rates in the U.K. and Europe for full-year 2021 and 2022 global demand and supply. Heightened demand from global
are high, the question is more, “what has not already been fac- investors for shares in the U.K. and European markets has been
tored into future equity market expectations?” Three key factors notable over recent months. Whilst such raised demand appears
are of particular interest. to have factored in high levels of optimism, the reality is a little
trickier given the high levels of pessimism over recent years
The first relates to hopes beyond the next six months. All finan-
from many global investors towards the U.K. and European mar-
cial markets always look forward, however only some of those
12JULY 2021
STOXX 600: 2021 EARNINGS GROWTH
(Selected Sectors)
Sector 2021 Earnings (Euro Billions) 2021 Growth %
Technology 43 11.9
Industrials 47.7
130.1
Healthcare 67.1
4.0
Financials 133.5
30.3
Consumer (non-cyclical) 62.8
9.3
Consumer (cyclical) 64.2
179.8
Base Materials 64.8
70.4
Source: I/B/E/S data
kets. The recovery of the pound and euro against many other Year-to-date performance from the U.K. and European equity
global currencies over the last year has been a reflection of markets has been strong. Whilst there can always be volatility in
greater confidence, but overall enthusiasm levels are still financial markets, the debate appears to be more set for next
modest against the norms of five or ten years ago. Once again, it year rather than the rest of this year, given the current scope for
can be easy to overly rely on recent data. improving full year 2021 realities. Prospects for 2022 and beyond
however remains more of a debate, especially if global inves-
And the third key influence? Unsurprisingly this relates to spe-
tors’ confidence continues to grow. Active investment will be
cific supply issues. The U.K. and European markets are always
more and more critical for equity markets in the U.K. and
influenced by their sector specific investment exposures and
Europe.
underlying global market exposure. Certainly by contrast
indices in the United States or Hong Kong / China not only have
a higher technology sector allocation but also a much greater
focus on their respective domestic profitability. On the former KEY TAKEAWAYS:
observation, sector allocations in the U.K. and European equity • U.K. and European stock markets have performed
markets are higher in the financial, healthcare, basic materials well year-to-date.
and consumer sectors than technology. Whilst on the latter
• Prospects remain strong for 2021 but markets always
point - compared to the U.S. market - there is a proportionately
look forward.
heightened impact from the emerging markets. Such different
sector exposures helps to explains some of the equity market • Global investors are set to keep raised allocation
performance differences over the last decade and the con- levels.
trasting performance of the last seven or eight months in
• Heightened active investment focus.
particular. As for future equity market prospects it highlights to
all investors importance of active investment in the U.K. and
European equity markets for the rest of this year, next year and
beyond.
13INVESTMENT STRATEGY QUARTERLY
Q&A - Inflation: The Year of Disbelief
Jeremy Batstone-Carr, European Strategy Team, Raymond James
Setting the stage:
If 2020 was the year to forget, might 2021 be the year of disbelief? News headlines, certainly financial news headlines are more often than
not being driven by shrill fears associated with the return of an inflationary beast that most, if not all, had believed to have been conquered
forty or fifty years ago. What makes these fears all the more remarkable is the fact that inflationary pressure, as measured by Consumer
Price Inflation (CPI) metrics is not everywhere. Yes, it is apparent in the United States and in the U.K. too. But in Europe and in Japan it is
nowhere to be seen, with prevailing CPI metrics are comfortably below central bank target levels.
Q: Is this inflationary “episode” being driven by the so-called Q: Is it true that not all prices are rising?
“reflation trade”?
A: A
bsolutely! Whilst much attention has inevitably focused on cer-
A: Monetary
theorists have always stated that if one produces tain specific “hot” pockets, such as used automotive vehicles
excessive stimulus, through interest rate cuts, balance sheet and commodity prices, the prices of other items haven’t budged.
expansion and especially when combined with significant fiscal Taking U.S. CPI as an example, of the 70 items comprising the
stimulus, then inflation will come storming back. Economic pur- “basket”, only five are seeing prices roaring higher while thirty
ists, especially those of a monetarist persuasion, will forever are seeing prices steady or still falling. Something similar is hap-
argue that inflation is a phenomenon created by monetary poli- pening in the U.K. too. It is perhaps important to add that other
cies. If a central bank prints money (expands the money supply), than owner equivalent rents, house prices are generally
then an inflationary episode cannot be far behind. Yet, the great excluded from inflation calculations (although there is a live
counter-weight to this view, historically, was globalisation. The debate at the European Central Bank about this subject right
inclusion of increasing numbers of emerging market economies now). For this important reason, it seems highly likely that CPI
into the manufacturing supply chains of the developed world metrics are not telling the whole story. The cost of living is rising,
worked incredibly well at keeping prices low. but inflation is not!
14JULY 2021
Q: D
oes much of the debate about inflation surround a possible was intended to act as income replacement due to pandem-
central bank policy response? ic-induced shutdown, yet now it is well known that these
amounts have been far greater than what might have otherwise
A: T
his is clearly a hugely important point for investors in finan-
been received in wages. This has resulted in the flood of
cial assets. What should be highlighted from the outset is
spending underlying the global economy’s rapid recovery. At
central bankers’ obsession with trying to evolve a (developed)
the same time, enforced business shutdown has forced the
economy that produces inflation at an average annual rate of
manufacture and distribution of many items to be disrupted,
2%. What is extraordinary about this target is how it was calcu-
notably silicon chips, essential in the smooth evolution of an
lated or deemed to be appropriate. Despite volumes of erudite
economic cycle. The outcome is lower supply smacking straight
journals, millions of hours of lectures and armies of PhDs all
into higher demand for goods and services. The result is rising
working assiduously on the matter, the 2% dropping out of the
prices and apparent inflation.
end of the pipe is, in fact, a number created out of thin air. Is it
appropriate that policy settings be adjusted simply on the Q: If that is right, then the inevitable conclusion to this episode
basis that inflationary pressure has, perhaps temporarily as must be that once supply and demand are back in equilibrium
central bankers tell us, overshot this arbitrary line in the sand? the inflation we are seeing should subside?
Q: Why hasn’t inflation been booming for years? A: E
xactly! The combination of more and more businesses reo-
pening should, in time, result in a return to pre-pandemic
A: O
ther than the above reasons, since the bursting of the tech
supply. Furthermore, once government support for businesses
bubble developed economies have operated through 15 of 21
and households concludes, demand should very likely retreat
years with interest rates near zero, whilst also having central
from today’s elevated levels. This should have the effect of
banks implement quantitative easing. Yet during those same
driving prices lower.
years underlying CPI (excluding food and energy) has exceeded
the magical 2% threshold in only three of them in the U.S. and CONCLUSION
never in Japan or the Eurozone. Monetarists might argue that,
Firstly, central bank monetary policy is not creating inflation. Sec-
even at or close to zero (and negative in Japan and the Euro-
ondly, fiscal policy and especially government handouts are
zone) interest rates were simply not cut enough and not enough
creating inflation. Thirdly, global shutdowns one year ago are cre-
electronic money was printed! In fact, the opposite to that which
ating easy comparatives, but these “base effects” will diminish over
was thought necessary has occurred. Instead of historic stim-
time. Fourthly, shutdowns have created supply disruptions which,
ulus resulting in a spending splurge, ever larger amounts of
unless becoming permanent, will diminish as supply comes back
private capital has decided not to participate in the real economy
on line. Fifthly, and lastly, central banks must set policy not for the
but been parked elsewhere. The velocity of money has col-
here and now but for the months ahead. They must also play their
lapsed and financial asset prices have sky-rocketed.
part in minimising medium or longer term economic risk. If activity
Quantitative easing is a deliberate, if indirect, means by which levels dwindle as fiscal stimulus is withdrawn (to be replaced by
central banks suppress interest rates for as long as possible. In so fiscal tightening), ultra-accommodative monetary policy must act
doing, central banks are effectively funding mountainous (and as the counter-weight. The bigger risk is not transient inflation now,
rising) government budget deficits and debt rollovers, essential but sustained economic weakness in the future.
if countries are not to default. Yet all these newly created reserves
are simply clogging up the banking system and are not being
released by new loans or credit creation. It is this “clogged up” KEY TAKEAWAYS:
part of the QE process that suggests that the apparent rise in • Central bank monetary policy is not creating inflation.
inflation we are now seeing is not really occurring due to mone- • Fiscal policy and especially government handouts are
tary policy. creating inflation.
Q: So, if not monetary policy then what? • Global shutdowns one year ago are creating easy
comparatives but “base effects” will diminish over
A: W
e need to look at the “other side” of economic theory, in short-
time.
hand “Keynesian” or fiscal policy. Specifically, this refers to the
fact that across developed economies, to a lesser or greater • Central banks must set policy for the months ahead.
extent, many businesses and households have either directly or
• The bigger risk is not transient inflation now, but sus-
indirectly received payment from the government. Initially this
tained economic weakness in the future.
15DISCLOSURE Issued by Raymond James Investment Services Limited (Raymond James). The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The taxation associated with a security depends on the individual’s personal circumstances and may be subject to change. The information contained in this document is for general consideration only and any opinion or forecast reflects the judgment of the Research Department of Raymond James & Associates, Inc. as at the date of issue and is subject to change without notice. You should not take, or refrain from taking, action based on its content and no part of this document should be relied upon or construed as any form of advice or personal recommendation. The research and analysis in this document have been procured, and may have been acted upon, by Raymond James and connected companies for their own purposes, and the results are being made available to you on this understanding. Neither Raymond James nor any connected company accepts responsibility for any direct or indirect or consequential loss suffered by you or any other person as a result of your acting, or deciding not to act, in reliance upon such research and analysis. If you are unsure or need clarity upon any of the information covered in this document please contact your wealth manager. APPROVED FOR CLIENT USE Head Office Ropemaker Place 25 Ropemaker Street London EC2Y 9LY www.RaymondJames.uk.com Raymond James Investment Services Limited is a member of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority Registered in England and Wales number 3779657 Registered Office Ropemaker Place 25 Ropemaker Street London EC2Y 9LY
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